Fed watchdogs sniff around IBM's cloud revenue reporting

It's official: Big Blue coughed up 'about' $2bn for SoftLayer

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IBM filed its quarterly 10-Q report with the US Securities and Exchange Commission Wednesday morning, and buried in that lengthy document is a note that the Securities and Exchange Commission (SEC) has raised an eyebrow over the way IBM recognizes its revenues for cloud computing.

There is not a whole lot of detail about exactly what raised flags at the SEC with regards to IBM's cloud business, and IBM spokespeople will not comment on the issue beyond what is in the 10-Q document. (IBM's cloud spokesperson had not returned a call for comment as we go to press.)

This is all Big Blue said about the SEC inquiry in the always amusing section about significant legal matters in the 10-Q report: "In May 2013, IBM learned that the SEC is conducting an investigation into how IBM reports cloud revenue. IBM is cooperating with the SEC in this matter."

How the SEC even knows to be suspicious about IBM's cloud revenues is also a bit of a mystery, since the company does not provide revenues by product category, only by the groups that operate different aspects of its business – Software Group, Systems and Technology Group, and Global Services are the biggies.

IBM has talked a bit obliquely about its cloud-related revenues in the past. Back in March 2011 when former chairman and CEO Sam Palmisano rolled out the 2015 Roadmap – the business plan to double operating earnings per share between 2011 and 2015 that new CEO Ginni Rometty is trying to fulfill – the goal was for cloud computing to bring in $7bn by 2015. CFO Mark Loughridge, however,said that this would only represent about $3bn in net–new revenue, as customers with strategic outsourcing contracts shift to cloudy infrastructure deals.

Big Blue vaguely hints at how cloud-related sales are doing when it talks to Wall Street analysts, and when reporting its second quarter results a few weeks ago, the company said that cloud revenues were up 70 per cent in the first six months of 2013 compared to the same period a year earlier.

These revenues, whatever number they are, include the SmartCloud Enterprise public cloud, of course, but do not yet include any revenues from the acquisition of cloud operator SoftLayer Technologies this June.

Rumors going around back in March had both IBM and EMC sniffing around SoftLayer for a possible deal, and the talk was that the acquisition would cost more than $2bn. (The chatter was that AT&T had even earlier taken a look at snapping up SoftLayer, but for whatever reason did not pursue a deal.)

When IBM announced its SoftLayer deal in June, it did not divulge the price it was paying for the privately held cloud operator, but in the SEC filing, IBM said the price was about $2bn. (Why it can't be precise is unclear.)

IBM closed the SoftLayer acquisition on July 8, and SoftLayer will be tucked up into a new Cloud Services division within Global Services that is headed up by general manager James Comfort, and that will merge IBM's SmartCloud Enterprise and SoftLayer clouds. (Erich Clementi, who is in charge of the Global Technology Services group at IBM, was supposed to run this cloud division according to the announcement from back in June, but IBM picked a distinct GM for it after a second thought.)

SoftLayer has 21,000 customers and over 100,000 servers in its data centers in San José, Seattle, Houston, Washington DC, Singapore, and Amsterdam. El Reg estimates, based on past sales figures obtained from SoftLayer and the server pool growth at the company in the past year, that SoftLayer brings in maybe $100m in sales per quarter here in 2013.

In the statement announcing the closing of the SoftLayer deal, IBM said that it had done more than a dozen "strategic cloud acquisitions" since 2007, and that its cloud revenues grew by 80 per cent in 2012. The company added that it had over 100 cloud-based applications that it was peddling to customers, covering everything from marketing, procurement, e-commerce, customer service, human resources, and city management.

It could be that these SaaS applications are raising the SEC eyebrows because there are very specific rules about revenue recognition for software.

Bootnote After this story went to press, IBM reached out to El Reg with the following statement: "IBM's reporting of cloud revenue is the result of a rigorous and disciplined process, and we are confident that the information we have provided has been consistently accurate. IBM's cloud revenue includes only GAAP, ledger based revenue." ®